Inflation means the decline of the purchasing power of a particular currency over a specified period of time. The quantifiable estimate of the rate at which the currency declines in the purchasing power that occurs can be reflected in the increase of an average price level of selected goods and services in an economy over a period of time. The rise in the level of prices has often expressed a percentage which means that a unit of currency effectively buys less than it did in the previous periods.
Deflation runs in contrast to the term inflation.
The economy can be of a complex nature, then the nature of the inflation rate will not be tough to understand. Essentially, the inflation rate is a quantitative measure of the rate at which the average price level of the selected goods and services in an economy will gradually increase over a certain period. As a result of this increase over the period, a larger quantity of the currency is to be required to purchase the said goods.
This measurement is generally to be expressed as a percentage which will indicate the decrease in the purchasing power of a nation’s currency.
With all these factors being considered, the importance of the inflation rate will then lie in how the economy will get affected. If the average cost of the items increases, the currency loses its value, and the increased funds are then required to acquire the same goods and services as before.
To measure inflation, we can use the CPI method
Inflation = (CPI x +1 – CPI x) * 100
Here, CPI x is the Initial Price of the Index.
The Real rate of return is the annual percentage of the profit which is earned on an investment that is adjusted for inflation. The real rate of return exactly indicates the purchasing power of a given amount of money over a particular time period.
Adjusting this nominal return to compensate for inflation allows the investor to determine how much of a nominal return is a real return.
In addition to adjusting for the inflation rate, the investors should consider the impact of the factors like taxes and investing fees which are required to calculate the real returns on their money or to choose among various investing options.
The real rate of return is thereby calculated by subtracting the inflation rate from the nominal interest rate. The formula for calculating the real rate of return Is:
Real Rate of Return = (1+Nominal Rate / 1+ Inflation Rate) -1
The value of money can be reduced by inflation. Calculating a rate of return in real value rather than a nominal value, while particularly during a period of high inflation, will offer a clearer picture of an investment's success rate.
The time value of money is the basic financial concept which holds that the money in the present is worth more than the same sum of money that is to be received in the future. This is quite true as the money which we have right now can be invested and from that, we can earn a return, and this will happen by creating a larger amount of money in the future. (Even with the future money, there is an additional risk that the money will never be received, for one reason or another.) The time value of money is at times referred to as the net present value or the NPV of money.
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Inflation is a measure of the rate of change in the prices when they are compared to a selected basket of goods over a specific period of time. Inflation is generally indicated by a rise in the prices of goods and services hence this indicates a fall in the purchasing power.
An inflation calculator can be used to calculate the effect of inflation on purchasing power.
The uses of the inflation calculator are as follows:
Easy to use
The inflation calculator is found online thus, it's easy to use. One needs to only enter the amount of money to calculate the purchasing power of the same in the future.
Free to use
The calculator is available on the web itself and is free to use multiple times.
The calculator gives the accurate worth of money in the future. This also provides the worth of the same money if it is invested. The inflation calculator uses historical rates to calculate the same. Hence the results are then accurate.
Using the inflation calculator gives results within seconds and thus saves time for the investor. However, the same calculation might take time if done manually.
1. What is Purchasing Power?
Ans. The Purchasing power is the value of a currency which is expressed in terms of the number of goods or services that one unit of money can buy. This purchasing power is quite important because, all else staying equal, inflation decreases the number of goods or services that would be able to be purchased.
Consumer purchasing power also measures the value in money for which the consumers may purchase goods or services. Tied to the Consumer Price Index, or the Cost-of-Living index as this is also known in the United States, the consumer purchasing power here indicates the degree to which inflation affects the consumers' ability to buy the goods and services.
2. Who are Investors?
Ans. An investor is a typical type of person who allocates capital with the only expectation of a future financial return known as his investment profit or to gain an advantage that is termed as interest. With this allocated capital most of the time the investor purchases types of property. Types of investments include equity, debt, securities, real estate, infrastructure, currency, commodity, token, derivatives. He is the one who provides a business with capital and he is someone who buys a stock.
3. What is a Nominal Interest Rate?
Ans. The nominal interest rate or the money interest rate is the percentage of increase in the money that one pays to the lender for the use of the money that is being borrowed.
For instance, if you have borrowed Rs.1000 from your bank one year ago at 8% interest on the loan. Then the nominal interest rate doesn't take inflation into this account.